Global Trading System Crisis and Geopolitical Shifts

The global trading system in 2025 is facing a deep crisis. The World Trade Organization (WTO) and the rules-based multilateral order that once anchored international trade are now under severe strain. Geopolitical tensions, economic security concerns, and regulatory barriers are reshaping global commerce. The three dominant players—the United States, European Union, and China—are pursuing divergent strategies. Their policies undermine the stability and predictability essential for global trade growth.

United States’ Unilateral Trade Policies

The US has shifted decisively towards unilateralism. It imposes tariffs on countries with trade surpluses regardless of their political alignment. Tariffs on steel and aluminium have expanded to 15 sectors, including unexpected products like kitchen cabinets. US trade agreements demand partners lower tariffs and non-tariff barriers for American goods and digital services. They must also invest in the US, buy American energy or defence products, and open resource markets to US firms. The US offers minimal tariff relief in return. For example, Japan’s deal channels 90% of profits from investments back to the US. A three-tier tariff system exists – 10% for surplus partners, 15% for deficit partners with deals, and above 20% for those without deals. India currently faces the highest tariffs, including an extra 25% due to its Russian oil purchases.

Challenges to WTO and Multilateralism

The US actions breach the WTO’s most-favoured-nation principle by discriminating among countries. Tariffs often exceed agreed limits, violating multilateral commitments. Bilateral deals that do not meet free trade agreement (FTA) standards further erode WTO rules. US trade representatives have openly stated their aim to create a two-tier global trading system prioritising rebalancing and using tariffs as a formidable stick. This undermines the WTO’s authority and global trade fairness.

China’s Strategic Trade Approach

China claims support for multilateralism but manipulates WTO norms for national benefit. Its socialist market economy blends state control with market forces, enabling industrial overcapacity and cheap exports. China dominates key sectors like rare earths, semiconductors, and renewables. It uses initiatives like the Belt and Road, the Asian Infrastructure Investment Bank, and currency swaps to build economic dependencies. China’s expanding free trade agreements and bids for leadership in trade blocs reflect its ambitions. However, partners risk debt dependency, supply chain vulnerabilities, and political pressure to accept China’s core interests.

European Union’s Regulatory Trade Strategy

The EU has adopted heavy regulation with climate and social goals serving as indirect industrial protection. The Carbon Border Adjustment Mechanism (CBAM) imposes tariffs on imports from countries failing EU emissions standards, ignoring differentiated responsibilities under the Paris Agreement. The EU maintains the world’s largest FTA network with over 45 agreements. It has compromised multilateral principles by striking transactional deals with the US involving investment and procurement commitments. The EU also seeks structural cooperation with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to navigate current trade uncertainties.

India’s Trade Balancing and Self-Reliance

India remains committed to WTO norms but has limited leverage with just 2.3% of global trade. It runs a large trade deficit with China, posing strategic risks. India’s self-reliance strategy includes filtering risky investments, boosting domestic manufacturing through production-linked incentives, building supply chain partnerships, and expanding its FTA portfolio. Agreements with the UAE, Australia, EFTA, and the UK are in place, with talks ongoing with the EU. The US remains India’s top trading partner despite high tariffs. Negotiations for a bilateral trade agreement continue, denoting the need for timely deals.

The Future of the Multilateral Trading System

The WTO faces an uncertain future as founding powers weaken its foundations. Reform is necessary to update rules on subsidies, state enterprises, transparency, digital trade, and environmental links. Reviving the dispute settlement system depends on agreement on rules. The 2026 WTO Ministerial in Cameroon may struggle to reach consensus. Possible futures include a US-led two-tier system, a WTO-minus-US approach, EU-CPTPP cooperation, or increased bilateralism. The established rules-based order that drove globalisation is fraying under geopolitical and economic pressures.

Questions for UPSC:

1. Critically discuss the impact of unilateral trade policies on the multilateral trading system and global economic stability.
2. Examine the role of China’s Belt and Road Initiative and Asian Infrastructure Investment Bank in reshaping global trade dynamics and economic dependencies.
3. Analyse the Carbon Border Adjustment Mechanism (CBAM) of the European Union and its implications for international climate commitments and trade equity.
4. Point out the challenges and opportunities for India in balancing its trade relations with the United States, European Union, and China in the current global trade environment.

Answer Hints:

1. Critically discuss the impact of unilateral trade policies on the multilateral trading system and global economic stability.

1. Unilateral tariffs breach WTO’s most-favoured-nation principle, undermining multilateral rules.
2. US tariffs on multiple sectors and partners create unpredictability and trade distortions globally.
3. Bilateral deals with unequal terms weaken WTO’s authority and encourage trade fragmentation.
4. Tariff escalation and national security exceptions are used as economic weapons, increasing tensions.
5. Such policies reduce global trade stability, harming growth and cooperation among nations.
6. Emergence of a two-tier trading system divides countries into friendly and adversarial camps, eroding trust.

2. Examine the role of China’s Belt and Road Initiative and Asian Infrastructure Investment Bank in reshaping global trade dynamics and economic dependencies.

1. BRI and AIIB finance infrastructure projects, linking countries economically to China’s orbit.
2. These initiatives promote trade routes favoring Chinese exports and supply chain dominance.
3. They increase partner countries’ debt dependency and strategic vulnerabilities.
4. China leverages these linkages to expand political influence and enforce its core interests.
5. They complement China’s industrial overcapacity and export-driven growth model.
6. Through these, China challenges the Western-led global trade architecture and multilateralism.

3. Analyse the Carbon Border Adjustment Mechanism (CBAM) of the European Union and its implications for international climate commitments and trade equity.

1. CBAM imposes tariffs on imports from countries not meeting EU emissions standards, aiming to prevent carbon leakage.
2. It challenges the WTO principle of non-discrimination by targeting specific countries’ environmental policies.
3. CBAM ignores ‘common but differentiated responsibilities’ under the Paris Agreement, disadvantaging developing nations.
4. It acts as a veiled industrial protection tool, potentially triggering trade disputes.
5. CBAM pressures trading partners to adopt stricter climate policies, influencing global environmental governance.
6. Its implementation raises questions on balancing climate goals with fair and equitable trade practices.

4. Point out the challenges and opportunities for India in balancing its trade relations with the United States, European Union, and China in the current global trade environment.

1. India faces high US tariffs and demands for investment, complicating bilateral trade negotiations.
2. Large trade deficit and strategic vulnerabilities exist in India-China relations, limiting leverage.
3. EU offers opportunities through a large FTA network, but negotiations are complex and ongoing.
4. India’s self-reliance strategy aims to boost domestic manufacturing and reduce import dependence.
5. Expanding FTAs (with UAE, Australia, EFTA, UK) help diversify trade and reduce overreliance on any single partner.
6. Balancing geopolitical pressures while adhering to WTO norms remains a delicate challenge for India.